November/December 2008 / Cover Story
Congress Mishandles Renewable Energy Tax Credit
Congress once again waited until late in its session to extend Section 45 of the Internal Revenue Code, better known as the production tax credit (PTC). The PTC was set to expire on December 31, 2008.
The author says that the window for qualifying facilities that finally was included in the version of the bill that passed – one year for wind and refined coal and two years for other renewable sources – is too short to be an incentive to develop new renewable energy generation projects.
The PTC, first established in 1992, provides an incentive tax credit for renewable energy produced and sold. Over its lifetime the PTC has undergone a series of one and two-year extensions and has been allowed to lapse three times – in 1999, 2001 and 2003.
Developers may factor in the likelihood that the PTC will be extended through their project’s in-service date in determining the attractiveness of their project, but they also factor in the uncertainty that the PTC will once again be allowed to expire – perhaps for the final time, and then not be available.
This inability to fully rely on and value the PTC causes developers and investors to discount the value of the credit in their modeling.
That in turn, the author writes, reduces incentive, makes financing projects much riskier and it constitutes a failure of tax policy.